The Times - UK (2022-06-11)

50 Saturday June 11 2022 | the times

Business

5

I

nflation at China’s

factory gates eased

to its slowest pace in

14 months as

lockdown

restrictions weakened

demand for steel,

aluminium and other

materials (Emma Powell

writes).

The producer prices

index rose by 6.4 per

cent last month,

according to the

National Bureau of

Statistics, its weakest

reading since March last

year and cooling from an

8 per cent rise in April.

In contrast with

inflationary pressures in

western economies,

China’s “zero-Covid”

policy has dampened

factory and retail

activity, which has also

disrupted supply chains.

Exports had shown

strong signs of recovery

last month, rising by

16.9 per cent in May

compared with a year

earlier, the fastest pace

since the start of the

year. However, this week

Shanghai brought back

some coronavirus

restrictions only days

after easing curbs on the

back of a two-month

lockdown, causing world

markets to stumble.

Growth in the

consumer prices index

remained static in May

at 2.1 per cent compared

with a year earlier;

economists had expected

a reading of 2.2 per cent.

The government

unveiled a batch of 33

policies last month

aimed at boosting the

economy. Hopes of

further stimulus helped

to boost Chinese equities

yesterday. The Shanghai

Composite index rose by

1.4 per cent, or 45.87

points, to 3,284.83.

China lockdown puts

lid on factory prices

VCG/GETTY IMAGES

Factories, such as this

toy company in

Jiangsu province,

have been increasing

their prices steadily

Growing fears about inflation

step up pressure on the Bank

Britons are braced for the worst bout of

inflation to hit the economy in more

than 13 years, raising fears at the Bank

of England that people are not

convinced by policymakers’ attempts to

bring down prices.

According to a quarterly survey

carried out for the Bank by Ipsos, the

polling company, households believe

that shop prices rose by an average of

6.1 per cent in May, up from 5 per cent

in February, before Russia’s invasion of

Ukraine triggered a rise in global

energy prices. Consumers expect

inflation over the next year to rise by

4.6 per cent, up from 4.3 per cent three

months ago and the highest level since

the survey began in 2009.

Inflation expectations are closely

watched by central bankers, who want

to assure consumers that monetary

policy is designed to keep inflation at a

2 per cent target. Inflation, at 9 per cent

last month, is at its highest in 40 years

and is on course to peak at more than

10 per cent this year when households

receive their autumn energy bills.

Higher inflation expectations risk

generating higher prices if workers

demand rising wages to compensate

for their rising costs.

The Bank has raised interest

rates by 25 basis points at its last

four meetings and it is on

course for another tightening

of policy when its rate-setters

on the monetary policy com-

mittee meet next Thursday.

Britain’s benchmark rate is 1 per

cent, its highest since 2009.

On average, more people

believe that the Bank will miss its

2 per cent inflation target in five

years’ time, with expectations for con-

sumer prices at 3.5 per cent, up from

3.3 per cent in February. More than

two thirds, or 70 per cent, of respon-

dents expected interest rates to rise

over the next 12 months, up from 65 per

cent in February’s survey.

The survey was the first to be carried

out since Russia’s invasion of Ukraine

caused a global energy price crisis and

raised the costs of grains and fertilisers.

The Bank estimates that about 80 per

cent of British inflation has been caused

by higher global energy prices.

Andrew Bailey, the Bank’s governor,

has admitted that monetary policy is a

relatively ineffective tool to bring

down consumer price rises when

they are caused by external

events. He also has warned of

further “apocalyptic” conse-

quences for inflation if Ukraine

is unable to plant and sell vital

crops such as sunflower seeds,

wheat and maize.

Samuel Tombs, at Pantheon

Macroeconomics, the consult-

ancy, said the survey numbers

strengthened the case for interest

rate rises next week to be kept at the

lower end of expectations and for the

MPC “to stick to raising the Bank rate

by 25 basis points, rather than switch-

ing to 50 basis points. Households’

long-term inflation expectations are

not well-anchored because they

anticipate the Bank of England squeez-

ing the life out of the economy.”

A separate survey by the Office for

National Statistics showed that more

than three quarters of the population

were worried by higher living costs. The

ONS said those with personal income

below £10,000 a year reported the

highest anxiety about rising prices.

Mehreen Khan Economics Editor workers

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its

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ancy

streng

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lower end

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Households say

shop prices rose on

average by 6.1 per

cent in May, up

from 5 per cent

in February

outvoted by a majority who included

Andrew Bailey, the Bank’s governor.

Shamik Dhar, chief economist at

BNY Mellon, said the MPC was likely to

opt for a 25-basis-point rise but that 50

basis points would be more appropriate.

“Monetary policy is still in accommo-

dative territory, inflation is heading for

10 per cent and the economy is slowing

but still holding up well,” Dhar said.

“Therefore the Bank should try to get to

a neutral or restrictive rate of interest as

soon as possible.”

Sanjay Raja, at Deutsche Bank, said

that at least three members of the MPC

would vote in favour of a 50-basis-point

rise, in the wake of the US Federal Re-

serve, which has accelerated its exit

from decades of ultra-loose monetary

policy. The Fed is set to make another

50-basis-point rise next week.

Raja said the Bank was on course to

raise rates at every meeting this year,

lifting expected interest rates to as high

as 2.5 per cent by February 2023, above

the 2.25 per cent that money markets

are expecting. “We think the more sub-

stantive tightening will likely deliver

the necessary cooling in the labour

market to ultimately bring inflation

down in the medium term,” he said.

Robert Wood, at Bank of America,

also expects the Bank to take a more

hawkish turn next week, by signalling

its intent to carry out more rate rises

later in the year.

The Bank of England is set to raise

interest rates for a fifth consecutive

time next week, with policymakers split

over whether to accelerate the pace of

monetary tightening to combat racing

inflation.

Economists and financial markets

expect rate-setters to lift the Bank rate

by at least 25 basis points, with a debate

among hawkish members over whe-

ther to go for 50 basis points. The Bank

Rate stands at 1 per cent, its highest

since the financial crisis in 2009.

Three of the nine-strong monetary

policy committee voted in favour of a

50-basis-point rise in May, but were

Mehreen Khan

1%

Base interest rate.

The Bank of

England’s monetary

policy committee

meets next week to

discuss another rise

Times research

Economists expect hawkish turn on rates